Barrier Option
A barrier option is a type of exotic option that is similar to a standard option, but with an added feature that triggers either a payoff or the cancellation of the option when a predetermined price level is reached. Barrier options are used to protect against large losses or to take advantage of large gains in the underlying asset. They are also used to hedge against market volatility. Barrier options are typically used in the foreign exchange, commodities, and equity markets.
History of Barrier Options
Barrier options were first introduced in the late 1980s as a way to protect against large losses or to take advantage of large gains in the underlying asset. Since then, they have become increasingly popular among traders and investors. Barrier options are often used in combination with other options, such as vanilla options, to create more complex strategies. Barrier options are also used to hedge against market volatility.
Comparison of Barrier Options
| Type | Payoff | Trigger |
|---|---|---|
| Up-and-Out | Payoff if price rises above barrier | Price rises above barrier |
| Down-and-Out | Payoff if price falls below barrier | Price falls below barrier |
| Up-and-In | Payoff if price rises above barrier | Price rises above barrier |
| Down-and-In | Payoff if price falls below barrier | Price falls below barrier |
Summary
Barrier options are a type of exotic option that is similar to a standard option, but with an added feature that triggers either a payoff or the cancellation of the option when a predetermined price level is reached. Barrier options are used to protect against large losses or to take advantage of large gains in the underlying asset. They are also used to hedge against market volatility. For more information on barrier options, visit Investopedia, The Balance, and Investing.com.
See Also
- Vanilla Option
- Binary Option
- Lookback Option
- Compound Option
- Chooser Option
- Spread Option
- Asian Option
- Cliquet Option
- Shout Option
- Range Option
